Budget 2024: Chalmers’ narrow budget path is now in peril

The interest rate outlook and budget task have changed dramatically in the week after Jim Chalmers returned from International Monetary Fund meetings in Washington DC.

In turn, the prospect of higher-for-longer inflation and interest rates has put pressure on the treasurer’s message that the focus of his May 15 budget will shift from fighting inflation to supporting economic growth. Notwithstanding Reserve Bank governor Michele Bullock’s narrative that interest rates could still go up or down from here, another one or two cash rate increases would be political dynamite, destabilising Labor’s re-election strategy and putting intense strain on the broader policy process.Amid the uncertainty, there remains a reasonable chance of the promised softish landing, with inflation coming down and interest rates starting to fall by the end of the year.

Australia’s political culture has evolved into one where any political problem delivers a fix of more spending. This has been partly obscured by Australia’s luck in being blessed by a surge of national income from the surge in iron ore, coal and LNG export prices from the pandemic and the Russian invasion of Ukraine. Dr Chalmers has resisted Labor demands to spend this temporary windfall, but the overall level of spending still needs to come down.

Source: Loan Digest (loandigest.net)

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